Carlyle's Choppy IPO Week

The Carlyle Group completed one IPO, at well below the target range, cut another back by two-thirds and cancelled a third due to under-subscription (lack of interest). HD Supply, expected to price at $22-25 per share, went public at $18.  IFR reported:

HD Supply’s deal is the fifth-largest IPO in the US this year. At eight-times net leverage, the company is among the highest-ever leveraged IPOs, compared with 7.5-times and 7.2-times on the recent IPOs of Intelsat and Realogy.

Leverage is the knife that cuts both ways.  Under an easy credit environment it fuels private equity underwriter (PEU) profits.  In a credit crisis it takes down firms.  Credit crises arise when regional markets, major financial institutions or certain types of credit instruments implode. 

The Chinese Shanghai market is under pressure, which may have reduced U.S. investor interest in Carlyle's cancelled IPO.  IFR Asia reported:

Carlyle-backed GDC Technology, a Hong Kong-based maker of digital-cinema servers, postponed its Nasdaq IPO of up to US$80.43m. The deal had been originally set to price on Wednesday.

Carlyle, with more than $176 billion in assets under management across 114 funds and 76 fund of funds vehicles, couldn't inspire investor confidence to subscribe to an $80 million deal.   IFR Asia added:

Carlyle-backed New Century Real Estate Investment Trust has cut the size of its Hong Kong IPO by 66%. It relaunched the deal on Friday, and aims to raise HK$676m (US$87m), versus a fundraising target of up to HK$1.97bn for the original deal.

This was despite offering a 2013 dividend yield of 7.62%–9.14%, achieved through dividend waivers from the controlling shareholders for the first two years.

The deal will be priced at the bottom of the guidance range of HK$3.50–$4.20, according to sources.

 
Despite these disappointments The Carlyle Group kept their good name, even in the wake of Edward Snowden's trashing Booz Allen Hamilton's reputation along with that of former Carlyle affiliate USIS.  USIS conducted the security investigation on Snowden.

Pensions & Investments noted:

But after 25 years, investors with Carlyle — a legend in the private equity world — remain loyal and unflappable.

How thick is this Carlyle "loyalty"?  CalPERS executives wouldn't say the dumping of their 4% Carlyle Group equity stake was a strategic decision.

The $259.8 billion California Public Employees' Retirement System, Sacramento, sold off 20% of its $1 billion limited partnership interest in Carlyle Partners V LP last year and this month sold its 4% stake in the now-public Carlyle Group. It also has not yet made a commitment to Carlyle's sixth buyout fund, despite being an investor in about 25 Carlyle funds, including four earlier buyout funds. 

Shedding its stake in the Carlyle Group was not a strategic decision, said CalPERS spokesman Joe DeAnda, and does not reflect a “lack of confidence in Carlyle or private equity in general.”

Of course it was a strategic decision.  The curtain remains fully in place.

Another Obama - Carlyle Group Bread Breaking

Fresh from hosting Carlyle Group co-founder David Rubenstein for dinner at the White House, Obama officials will dine with Carlyle executives in Africa.

Obama said that the involvement of emerging powers in Africa was a sign of the continent's economic potential and new vitality and also a warning to the United States that it cannot afford to stay on the sidelines.

Obama's tour, also including Tanzania, is meant to make up for lost time, as the son of a Kenyan who became the first black US president made only one brief stop in sub Saharan Africa, in Ghana, during his first term.

He is bringing with him some of his top economic advisors and CEOs and executives from blue chip American firms to drive new American investment and business links with the continent.

On Saturday, top aide Valerie Jarrett and US Trade Representative Mike Froman will hold a breakfast meeting with executives from groups including Coca Cola, Ford Motor Company, The Development Bank of South Africa, The Carlyle Group, Goldman Sachs International and the African Finance Corporation.

This is the same Valerie Jarrett who as Board Chair fired 30% of employees and eliminated their defined benefit retirement plan.  The African people should watch out.

Update 7-2-13:  After meeting with business leaders, like Carlyle's David Rubenstein, the White House postponed PPACA's employer mandate until 2015,  The aforementioned Valerie Jarrett cast the decision:

"as part of an effort to simplify data reporting requirements.  She said since enforcing the coverage mandate is dependent on businesses reporting about their workers’ access to insurance, the administration decided to postpone the reporting requirement, and with it, the mandate to provide coverage.  “We have and will continue to make changes as needed,” Jarrett wrote in a White House blog post. “In our ongoing discussions with businesses we have heard that you need the time to get this right. We are listening.”

Here's to you Mr. Rubenstein.  Another year of blight should enable private equity underwriters to scoop up more nonprofit, community hospitals on the cheap.

Carlyle's BankUnited Subsidy Totals $5.9 Billion

The Carlyle Group and its PEU brethren received $5.9 billion in subsidy for taking over BankUnited.  When the FDIC struck the deal it gave PEU sponsored BankUnited $2.2 billion in cash, instantly making it one of the best capitalized banks in America.  The FDIC sent another $3.7 billion to cushion losses, bringing the total subsidy to nearly $6 billion.  That's almost half of PEU BankUnited's current $12.7 billion value. 

Also, Carlyle Group co-founder David Rubenstein spent $630,000 on a newsprint version of the Declaration of Independence.  It's called patriotic philanthropy.  Make billions from Uncle Sam, use the proceeds to pick up rare historical items, loan them for public display while they remain in Rubenstein's name and grow in value. 

PEU Firms Fall Behind

Independent research cast doubts on previous claim by private equity underwriters that they are masters at improving productivity:    

Firms taken over by a private-equity buy-out see their performance fall even further behind their industry rivals, according to a new study.

Private equity raises money to buy a company with the primary objective of improving the fortunes of an under-performing firm to ultimately seek a re-flotation on the stock exchange or to sell it on at a profit.

But when researchers at Warwick Business School, Cardiff University and Loughborough University looked at all of the publicly-listed firms that had gone through a private-equity buy-out in the UK between 1997 and 2006 that was far from what they found.

During that decade 105 publicly-listed UK companies were bought-out by private equity investors and when their performance was compared against firms of a similar size in the same industry they found the productivity of the acquired firms lagged even further behind. Instead of improving following the shedding of jobs and assets the firms’ performance gap against the control group – as measured by turnover per employee - widened.

Professor Wood, who is Professor of International Business at Warwick Business School, said: “What we found was the promised productivity gains of a takeover rarely materialised. Rather, there was evidence of private-equity buy-outs reducing the number of workers and squeezing wages, without making the firm more efficient.

I've written about the race to the lowest common denominator on worker pay and benefits.  The study noted this PEU drive:

“Why do firms that are "taken over" perform worse? We believe that it is because outsiders find it more difficult to cost the worth of a firm’s human assets, and their combined knowledge and capabilities. Hence, they are more likely to lay off staff and less aware of the consequences this may have for future performance.

I expect the PECKER Council to respond vigorously.  PECKER stands for Private Equity Capital Knowledge Executed Responsibly.  

Obama Dinner Host for Carlyle Cofounder

President Obama hosted an intimate dinner for Carlyle Group co-founder David Rubenstein at the White House.  Rubenstein was a frequent visitor to the White House during the first two years of Obama's Presidency.  Forbes reported:

By midday he’s back in the capital, lunching at the White House with an old friend, National Security Advisor Thomas Donilon, before returning to the office to prepare with some of his dealmakers for Carlyle’s upcoming investors conference.

 
The Globe and Mail added Tony Blair attended an Obama White House dinner.  Rubenstein bought high political access for Carlyle since its founding in 1987.  Carlyle profited from its governmental associations and continues to do so today.  Blair facilitates political access, work important to Carlyle and company:

He (Blair) employs some 200 staff and is worth anywhere between CAN $95 and $125-million–-not bad for an old leftie. Clients include J.P. Morgan, the American banking giant that pays him $4-million a year; a consortium of South Korean investors and oil companies; Zurich Insurance; governments in Columbia, Brazil, Kazakhstan, Mongolia, China (the China Investment Corporation), Abu Dhabi, Kuwait, and various others.

Both Rubenstein and Blair legitimized Libyan leader Muammar Gadhafi, yet neither paid a price when the West decided Gadhafi had to fall.  Instead the media sacked Michael Porter. 

President Obama pretends to be against private equity underwriters (PEU).  If he's like most ex-politicians, someday Obama will be one. 

Carlyle Group Affiliates & Edward Snowden

The Carlyle Group's purchase of Booz Allen Hamilton infected the firm's culture, according to one ex-employee.  Edward Snowden, a Booz Allen Hamilton employee, revealed the extent of government secret spying on Americans.  This revelation angered America's greed and power class.  A rash of retaliatory measures are underway to get at Snowden..

One group garnering blame is USIS, the security contractor that performed Snowden's background check.  USIS is a former Carlyle Group affiliate.  Carlyle selected Washington, D.C. for its PEU headquarters based on access to power.

How many more Carlyle affiliates touched the Snowden leak?  Carlyle owned companies in the data center business.  Did any serve as NSA contractors? 

Update 9-28-13:  USIS is under scrutiny for seemingly flawed background checks.

Carlyle's Low Interest, Easy Money Redux

The WSJ asked Carlyle co-founder David Rubenstein to compare now to just before the financial crisis, both times of easy money and low interest rates:

Last time before the crisis arose officially, I think people recognized that we were in a bubble.  It was widely recognized.  People did think that subprime loans were real ready for a cutback.

The Carlyle Group recognized subprime loans were in a bubble?  Was that before or after the collapse of Carlyle Capital Corporation, a $22 billion mortgage backed securities fund?  Low interest rates and easy money fueled CCC, which collapsed due to high leverage.  FT reported:

A November 2006 offer memo described CCC’s plans for “superior risk- adjusted returns from investments in a diversified portfolio of fixed income investments” that “expects to pay investors 90 per cent of its net income, have net returns of 14.1 per cent and a projected net dividend yield of 12.5 per cent” by the fourth quarter of 2007.

The document added that about 86 per cent of the assets would be in triple-A rated mortgage assets. By the second quarter of 2007, CCC planned to have $9.2bn in mortgage assets – of which 94 per cent would be triple-A rated – and less than $1bn in bank loans and other corporate debt, with $19 of borrowed money for every $1 of investors’ money. 

Over the next 16 months, until CCC imploded in March 2008, investors did not receive a single dividend payment.

In today's low interest rate, easy money environment Carlyle's fastest growing businesses are their hedge funds and collateralized loan obligations, pooled debt instruments like subprime mortgages.  Before the financial crisis Carlyle lost BlueWave Partners, a hedge fund, in addition to Carlyle Capital Corporation.

Small investors should study Carlyle's history, because their founders, like U.S. Presidents will rewrite the past to favor them in the present. 

Update 6-18-13:  Fitch predicted China's debt bubble will collapse.